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Equity refers to the owner, equity and
finance. Usually, small businesses such as partnerships and private property
are run by their owners with their own capital. Joint stock companies operate
on the basis of share capital, but their management differs from shareholders
and investors.

Advantages of Equity Finance:

The following are the benefits of
equity financing:

(i) Permanent in nature: Equity finance is of a lasting nature. There is no need to repay it
unless wear and tear occurs. Shares that were once sold remain on the market.
If any shareholder wishes to sell these shares, he may do so on the stock
exchange where the company is listed. However, this will not create any
liquidity problems for the company.

(ii) Solvency: Equity financing increases the solvency of the business. It also
helps to improve the financial situation. Sometimes share capital needs to be
increased by inviting public offers to subscribe to new shares. This allows the
company to cope with the financial crisis.

(iii) Loan value: Strong equity financing increases creditworthiness. Companies with
a high proportion of equity financing can easily borrow from banks. In contrast
to the companies that are heavily indebted, they are no longer attractive to
investors. A higher proportion of equity capital means that less money is
needed to pay interest on loans and financial expenses, so that much of the
profits will be distributed among shareholders.

(iv) No interest: No interest is paid to external parties in the case of equity
financing. This increases the net income of the company which can be used to
increase the scope of the business.

(v) Motivation: As with equity, all profits remain with the owner, giving him the
incentive to work more. Inspiration and care are greater in companies that are
financed by the owners’ equity. This keeps the businessman conscious and active
in seeking opportunities and earning profits.

(vi) No risk of bankruptcy: As there is no borrowed capital, no strict cost estimate is
required to repay. This makes the entrepreneur free of financial worries and
there is no risk of bankruptcy.

(vii) Wear: In the event of winding-up proceedings or bankruptcy proceedings,
there is no fee for outside parties on the assets of the company. All
properties remain with the owner.

(viii) Increasing capital: Joint stock companies can increase both issued and recognized
capital after complying with certain legal requirements. So in times when the
need for capital can be increased by selling extra shares.

(ix) Benefits of macro level: Equity financing provides many social and macro benefits. First, it
reduces the factors that are of interest to the economy. This makes people
financially worried and panic. Second, the growth of joint stock companies
allows a large number of people to share in its profits without actively
participating in its management. Thus, one can use their savings to earn
long-term monetary rewards.

Loading amounts:

The following are the conditions for
capital financing:

(i) Decrease in working capital: If the majority of corporate funds are invested in fixed assets,
companies may experience a shortage of working capital. This problem is common
in small businesses. The owner has fixed capital to begin with and the majority
of it is consumed by fixed assets. So less is left to meet the current expenses
of the company. In large-scale transactions, financial management can also lead
to similar problems.

(ii) Difficulty paying regularly: In the case of equity financing, a businessman may experience
problems with regular and recurring payments. Sales revenue can sometimes fall
due to seasonal factors. If there is insufficient funds available, there would
be difficulties in meeting short-term debt.

(iii) Higher taxes: Since no outsider has to pay interest, the company’s taxable income
is higher. This leads to a higher incidence of taxes. Furthermore, double
taxation is in some cases. In the case of a limited liability company, all
income is taxed before the appropriations are available. When a dividend is
paid, it is again taxed on the recipient’s income.

(iv) Limited expansion: Due to equity financing, the businessman is unable to increase the
scope of operations. The expansion of the business requires a lot of capital to
build a new factory and capture more markets. Small-scale companies also do not
have the professional advice available to extend their market. There is a
general tendency for owners to try to keep their business within such limits so
that they can maintain control over it. Because transactions are funded by the
owner himself, so he is very obsessed with the chances of fraud and fraud.
These factors prevent business expansion.

(v) Lack of research and
development: Research and development is lacking in
companies that operate solely on equity. Research activities take a long time
and enormous resources are needed to achieve a new product or design. This
research activity is undoubtedly costly, but in the end, when their results are
launched in the market, high income is generated. But there is a problem that
if the owner uses his own money to fund such long-term research projects, he
will have trouble meeting short-term debt. This factor reduces investment in
research projects in companies financed by equity.

(vi) Exchange Delay: Equity finance companies have trouble modernizing or replacing
financial equipment when it does. The owner tries to use the existing equipment
for as long as possible. At times, he may even look past the deteriorating
quality of production and continue to run old equipment.